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Thursday, 3 August 2017

Finance: 8 analysts on what to expect from the Bank of England's Monetary Policy announcements

The Bank of England is back from its summer holiday.

LONDON — The Bank of England is back from its summer holiday, and deep in the heart of its Threadneedle Street headquarters, the bank's key Monetary Policy Committee on Wednesday decided what to do with interest rates and its quantitative easing programme.

Those decisions, alongside the bank's quarterly Inflation Report — the three-monthly update of its forecasts for the British economy — will be released later on Thursday, with the news dropping at 12.00 p.m. on the dot.

The BoE aggressively cut interest rates during the 2007-2009 period in order to cope with the shock brought to the British economy by the global financial crisis, but remained on hold for more than seven years after that. Between 2009 and August 2016 the base rate stayed at 0.5%.

It then dropped to 0.25% after the bank's emergency cut in August, which intended to soothe the economy in the immediate aftermath of the vote.

However, in the nearly two months since the MPC last met, speculation has grown that the bank could use August's meeting to hike rates back to 0.5%.

Inflation had surged as high as 2.9% in April and May, but moderated in June, dropping to 2.6%. This, many in the markets believe, has all but ended any chance of a hike this week.

Business Insider rounded up forecasts strategists, analysts and economists from banks, asset managers, and research houses to get a picture of how the City of London expects Thursday's decision to go down.

"In the end, we think the doves hold on... An August hike still looks entirely possible, and we expect a hawkish tone to this Inflation Report. Three members voted for a June hike, of whom two are still on the MPC. Chief Economist Haldane turned hawkish. MPC tolerance for an inflation overshoot falls as the output gap closes – and the unemployment rate is now at its equilibrium on the BoE's estimate.

"But three MPC members (Vlieghe, Broadbent, Cunliffe) have said that now is not the time to hike, marking them as doves, while for the two members (Carney, Tenreyro) where it is less clear cut, we think they are more likely than not to stay on hold in August."

"Recent public comments by Ian McCafferty and Michael Saunders ... suggest they likely will continue to vote to raise interest rates this week. But we doubt that any of the other six MPC members will join the hawks. New external member Silvana Tenreyro's voting record on the Mauritian MPC hints at dovish leanings, as we showed here.

"And while Chief Economist Andy Haldane said in June that it would be "prudent" to tighten policy 'moving into the second half of the year,' he spoke before the dip in inflation in June. We continue to judge that GDP growth and wage growth will remain too weak, and fiscal policy too restrictive, to warrant higher interest rates this year or next."

"We think the Bank of England will stay on hold. The Bank’s rhetoric has become more hawkish over the past few months, because they have been surprised by the resilience of the labour market, and the extent of the rise in inflation. But we think they will be held back from tightening this week, and probably for the rest of the year, by the slowdown in growth, as real incomes have been squeezed by imported inflation, and by the continued uncertainties over Brexit. The degree to which the government loosens fiscal policy in the autumn budget will also be an important factor."

Jordan Rochester and team, Nomura: 60% chance of a rate rise

"The MPC meets next week to set policy, an event for which the markets are pricing in less than a 10% chance of a 25bp hike. Whatever one thinks of our call for higher rates on 3 August, market pricing seems particularly low with the Bank having warned repeatedly about its limited “tolerance” for above-target inflation since the end of last year.

"We justify our call for taking back a modest amount of the large monetary stimulus that the Bank has delivered over recent years. We put the probability of a rate rise at just 60% and consider the risks to our view, outlining the reasons that the Bank may decide to keep rates on hold. In summary, we do not believe that the market is appropriately priced for the risk of a rate rise next week."

The bank "will want to see whether inflation eases further after topping out last month from five-year highs, given that it is still running hot versus its 2% target.

They will "also need to see how wages growth and consumer spending develop in light of recent warnings about complacency towards household debt."

Carney and the rest of the MPC "need to keep a lid on things, but can’t risk suffocating" Britain's economy "amidst continued Brexit uncertainty."

"There are conflicting signals; GDP slower, while other metrics like retail sales are strong and the housing market remains resilient."

Van Dulken is also interested to "see how newbie Tenreyro votes, and of course dovish Chief Economist Andy Haldane who teased the hawks recently."

Nikesh Sawjani, UK Economist, Lloyds Commercial Banking: No hike

"Developments over the past month are unlikely to have persuaded any other member of the MPC to join the current cohort of Ian McCafferty and Michael Saunders in voting for a rate hike.

"Equally, we doubt that the downside news on activity will have been sufficient to discourage either of these members from voting for an immediate rate hike at this meeting. As a result, following Kristin Forbes’ departure from the MPC, we expect a 6-2 split vote in favour of keeping Bank Rate unchanged at the August meeting."

Bank of America Merrill Lynch: Manufacturing "flat as a pancake"

"Hawkish expectations for the Bank of England beat a retreat in the face of a smorgasbord of soft data. Inflation should peak soon, manufacturing output is flat as a pancake like retail sales so GDP growth in 1H 2017 was the weakest for four years.

"What would a rate hike signal? That the BoE is targeting growth weaker than 1% annualised? That does not make a lot of sense even before we get to talking about the downside risks. The textbook says “hold policy and look through inflation”. We expect a 6-2 vote to keep rates on hold at next week’s policy meeting and little disagreement with the market rate profile."

Martin Beck, Oxford Economics: No rate rise until first half of 2019

"The criteria set out by the Governor to justify a hike look a long way from being met. Moreover, Kristen Forbes, one of the three MPC members who voted for a rate rise in June, has since left the Committee. And while Ian McCafferty and Michael Saunders (the other members of the hiking trio) appear to be sticking to their guns, Mr Haldane’s view is likely to be cautioned by both Q2 GDP growth and CPI inflation in June coming in below the Bank’s expectations.

"Moreover, there has been no indication from the Committee’s doves that they have shifted positon (aswitnessed byrecent comments by Gertjan Vlieghe, Ben Broadbentand Jon Cunliffe).

"Recent macro data suggest that the Bank may cut its forecast for GDP growth this year in August’sInflation Report, bolstering that latter group. With the Committee still one member short (Sir Dave Ramsden will take uphis new post as Deputy Governor in September), we expect this month’s meeting to deliver a 6-2 vote for no change (the outcome is announced on 3 August). And we still think that Bank Rate will see no rise until the first half of 2019."